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Posted October 6, 2008 11:30 pm

Dismal September retail sales expected

NEW YORK - The weak retail sales merchants had been expected to post for September will likely prove to have been a disaster as the financial meltdown that began halfway through the month sent shoppers into hiding.

The expected dismal reports for a key month - the first full gauge of consumer behavior since the meltdown began - raise even more concerns for the holiday season and could mean even more stores closing amid deteriorating economic conditions.

"The retailer is in as much shock as the consumer," said John Morris, an analyst at Wachovia Capital Markets.

As merchants report their monthly sales figures Wednesday, the world's largest retailer, Wal-Mart Stores Inc., and warehouse club operators such as Costco Wholesale Corp. should be the only bright spots as consumers stick to bare-bone necessities.

September - when stores do much of their back-to-school business - is the third most important month of the year for retailers, behind December and June.

But results from department stores and mall-based clothing and furniture stores will likely show even bigger-than-expected sales declines. Stores have stepped up discounting in a desperate attempt to pull in shoppers.

Burt P. Flickinger III, managing director of Strategic Research Group, said he now expects about 1,000 to 1,500 stores will close in the two months after Christmas, up from his original estimate of 200 to 300 stores. He now predicts retailers will shutter 5,000 to 10,000 stores from now until the end of 2010, up sharply from his earlier estimate of 1,500 to 2,500.

That would make it the biggest retail shakeout since the early 1970s, when consumers were also confronting soaring food and oil prices, Flickinger said. Before the financial meltdown last month, he had expected the biggest retail retrenchment since 1999-2002.

"September is normally a strong month, so it is going to be a train wreck for retailers for the holiday season," Flickinger said.

Job, retirement worries

Shoppers who had already been focusing on buying essentials have pared back more in the past few weeks as they worried about the security of their jobs and retirement portfolios. On Friday, the Labor Department reported the nation's employers cut 159,000 jobs, more than double the cuts made just one month before. Credit markets remain frozen, which means shoppers are having a harder time getting loans and credit lines.

Shoppers seem too "petrified" to buy, said Bill Martin, co-founder of ShopperTrak RCT Corp., a research company that measures traffic and sales at more than 50,000 outlets across the country.

The number of customer visits to stores dropped 9.2 percent in September, ShopperTrak found - much weaker than the 3 percent to 5 percent average declines seen so far this year.

No good news was on the horizon, as the Dow industrials dropped another 500 points Monday and fell below 10,000 for the first time in four years. That joined a sell-off around the world as anxieties grew about the global effect of the financial crisis, despite bailout efforts by the U.S. and other governments.

Bailout no quick fix

The U.S. rescue plan "is not going to change the dynamic quickly," said Michael P. Niemira, chief economist at The International Council of Shopping Centers. "It has to work its way through the system. ... There is a lot of fear out there."

Niemira now expects same-store sales, or sales at stores opened at least a year, for September will be flat to up to 1 percent from the year-ago period. He had originally expected growth of 1.5 percent to 2 percent. Same-store sales are considered a key indicator of a retailer's health.

That would be well below the modest 2.3 percent average growth since the beginning of the retail industry's fiscal year in February, according to ICSC's measure.

Ken Perkins, president of research company RetailMetrics LLC, expects same-store sales to rise no more than 1.7 percent in September, down from his original growth forecast of 2.1 percent. Perkins' index only focuses on retailers whose Wall Street consensus estimates are available.

Niemira said the financial turmoil may lead him to reduce his holiday same-store sales growth forecast to 1.5 percent to 2 percent, down from the original 2.5 percent.

The deteriorating picture is forcing Wall Street analysts to cut their earnings forecasts for merchants for the second half of the year, particularly on those with mall-based stores.

Adrianne Shapira, a retail analyst at Goldman Sachs, wrote in a note released Monday that she's reducing her second-half 2008 earnings estimates by an average of 3 percent across 12 of the 23 retailers she tracks, with a heavy emphasis on department stores.

"As the financial crisis intensified, consumers were paralyzed and retail spending in September seemed to suffer a severe setback," she wrote.

She expects many stores will be reducing their third-quarter earnings outlooks when they report Wednesday, a day earlier than usual because of the Yom Kippur holiday Thursday.

Financial turmoil takes toll on sales

WHAT'S UP: Retailers are expected to report dismal same-store sales figures Wednesday, providing the first full gauge of consumer behavior since the financial meltdown began. The only bright spots will be discounters and wholesale clubs as customers focus on bare-bone essentials.

WHAT IT MEANS: With consumers cutting back even more, the outlook for the holiday season and for the industry is becoming darker. Michael P. Niemira, chief economist at the International Council of Shopping Centers, said the financial turmoil may lead him to reduce his holiday same-store sales growth forecast to 1.5 percent to 2 percent, down from the original 2.5 percent. Same-store sales are sales at stores opened at least a year and are considered a key indicator of a retailer's health.

WHAT'S NEXT: Stores could further slash their holiday orders, which were already below last year's levels. The retail industry, which had already suffered a string of bankruptcies and stores closings, could also see further consolidation. Burt P. Flickinger III, managing director of Strategic Research Group, expects retailers to see the biggest shakeout in the industry from now until the end of 2010 since the 1999-2002 period.